INTRODUCTION
PART 1
CHAPTER
Getting Started
1
CHAPTER CHECKLIST
When you have completed your study of this
chapter, you will be able to
1
Define economics and explain the questions that
economists try to answer.
2
Explain the core ideas that define the economic
way of thinking.
1.1 DEFINITION AND QUESTIONS
All economic questions and problems arise because
human wants exceed the resources available to satisfy
them.
Scarcity
The condition that arises because the available
resources are insufficient to satisfy wants.
Faced with scarcity, we must make choices—we must
choose among the available alternatives.
The choices we make depend on the incentives we
face.
1.1 DEFINITION AND QUESTIONS
Economics
The social science that studies the choices that we make
as we cope with scarcity and the incentives that
influence and reconcile our choices.
Two big economic questions:
• How choices determine what, how, and for whom
goods and services get produced?
• When do choices made in self-interest also
promote social interest?
1.1 DEFINITION AND QUESTIONS
What, How, and For Whom?
Goods and services
The objects (goods) and actions (services) that people
value and produce to satisfy human wants.
What goods and services get produced and in what
quantities?
How are goods and services produced?
For Whom are the various goods and services
produced?
1.1 DEFINITION AND QUESTIONS
When Is the Pursuit of Self-Interest in the
Social Interest?
Self-interest
The choices that are best for the individual who
makes them.
Social interest
The choices that are best for society as a whole.
1.1 DEFINITION AND QUESTIONS
Can choices made in self-interest also serve the
social interest?
Let’s illustrate with eight topics:
1.Globalization and international outsourcing
Globalization and international outsourcing are
in the interest of owners of multinational firms
that profit, but is it in the social interest?
1.1 DEFINITION AND QUESTIONS
2. The new economy
Makers of computer chip and programs
developed products in their self-interest but did
they develop their products in the social
interest?
3. Disappearing rainforests
When we buy products made with ingredients
from rainforests are we damaging the social
interest?
1.1 DEFINITION AND QUESTIONS
4. Water shortages
Are the global water resources managed in the
self-interest or in the social interest?
5. Global warming
The choices we make concerning how to
produce and use energy are made in our selfinterest but do they serve the social interest?
1.1 DEFINITION AND QUESTIONS
6. Katrina
The events following Katrina illustrate the tension
between self-interest and social interest.
Without government enforced laws, self-interest
can be carried too far and damage the social
interest.
Price hikes serve the self-interest of producers
and hurt the self-interest of consumers. Do they
serve the social interest?
1.1 DEFINITION AND QUESTIONS
7. Unemployment
Firms hire workers in their self-interest and
people accept jobs in their self-interest but is
the number of jobs available in the social
interest?
1.1 DEFINITION AND QUESTIONS
8. Social Security Time Bomb
As baby boomers reach retirement age, social
security payments will increase faster than the
taxes used to pay them and the United States
will have to borrow from foreigners.
Someone will have to pay off these debts. Each
voter’s choice about who will pay is made in the
self-interest but is it in the social interest?
1.2 THE ECONOMIC WAY OF THINKING
Core Economic Ideas:
•
•
•
•
•
Rational choice
Cost
Benefit
Margin
Incentives
1.2 THE ECONOMIC WAY OF THINKING
Rational Choice
Rational choice
A choice that uses the available resources to best
achieve the objective of the person making the choice.
We make rational choices by comparing costs and
benefits.
1.2 THE ECONOMIC WAY OF THINKING
Cost: What You Must Give Up
Opportunity cost
The best thing that you must give up to get
something—the highest-valued alternative forgone.
Sunk Cost
A previously incurred and irreversible cost.
A sunk cost is not part of the opportunity cost of a
current choice.
1.2 THE ECONOMIC WAY OF THINKING
 Benefit: Gain Measured by What You Are
Willing to Give Up
Benefit
The gain or pleasure that something brings.
 On the Margin
Margin
A choice that is made by comparing all the relevant
alternatives systematically and incrementally.
1.2 THE ECONOMIC WAY OF THINKING
Marginal Cost
The cost of a one-unit increase in an activity
Marginal Benefit
What you gain when you get one more unit of something.
Making a Rational Choice
When we take those actions for which marginal benefit
exceeds or equals marginal cost.
1.2 THE ECONOMIC WAY OF THINKING
Responding to Incentives
Incentive
A reward or a penalty—a “carrot” or a “stick”—that
encourages or discourages an action.
1.2 THE ECONOMIC WAY OF THINKING
Micro and Macro Views of the World
Microeconomics: The study of the choices that
individuals and businesses make and the way these
choices interact and are influenced by governments.
Macroeconomics: The study of the aggregate (or
total) effects on the national economy and the global
economy of the choices that individuals, businesses,
and governments make.
1.2 THE ECONOMIC WAY OF THINKING
Economics as a Social Science
Economists distinguish between
• Positive statements: What is
• Normative statements: What ought to be
The task of economic science:
To test positive statements about how the economic
world works and to weed out those that are wrong.
1.2 THE ECONOMIC WAY OF THINKING
Unscrambling Cause and Effect
The central idea that economists use to unscramble
cause and effect is ceteris paribus.
Ceteris paribus means “other things being equal.”
By changing one factor at a time and holding other
relevant factors constant, we are able to investigate the
effects of the factor.
1.2 THE ECONOMIC WAY OF THINKING
In the real world, we observe the outcomes of
simultaneous operation of many factors.
To sort of the effects of each factor, economists use
• Natural experiments
• Statistical investigations
• Economic experiments
Natural experiments: A situation that arises in the ordinary
course of economic life in which the one factor of interest
is different and other things are equal.
1.2 THE ECONOMIC WAY OF THINKING
A statistical investigation looks for a correlation.
Correlation
The tendency for the values of two variables to move in
a predictable and related way.
An economic experiment puts people in a decisionmaking situation and varies the influence of one factor
at a time to discover how they respond.
1.2 THE ECONOMIC WAY OF THINKING
Economics as Policy Tool
Economics provides a way of approaching problems in
all aspects of our lives: personal, business, and
government.